Will 2018 Be J. C. Penney Company, Inc.'s Best Year Yet?

The retailer has made some major changes that appear to be paying off.

Daniel B. Kline
Daniel B. Kline
Dec 10, 2017 at 7:48AM
Consumer Goods

J.C. Penney (NYSE:JCP) has struggled mightily as the entire retail world has evolved. The company has avoided becoming a casualty of the so-called "retail apocalypse," but it has not shown that it has a clear path to success -- or even survival.

There have been some recent signs that the company may finally be turning a corner, along with some that it's continuing to struggle. J.C. Penney reported that Q3 comparable store sales rose by 1.7%, while overall sales dropped by 1.8% to $2.81 billion, compared to $2.86 billion in the same period last year. The drop was mostly due to stores closing, but the retailer did also see its losses grow to $128 million from $67 million in Q3 2016.

The company blamed that increase on "increased cost of goods sold, restructuring charges associated with the store closures and a charge related to settlement accounting on the company's pension plan." CEO Marvin Ellison explained what happened in his remarks in the Q3 earnings release:

"During the third quarter, we took aggressive actions to clear slow-moving inventory, primarily allowing for an improved apparel assortment heading into the holiday season," he said. "While these actions had a negative short-term impact on profitability in the third quarter, we firmly believe it was the right decision for the company as we transition into the fourth quarter and fiscal 2018."

The exterior of a J.C. Penney store

J.C. Penney has made some major changes to its stores. Image source: J.C. Penney.

What has J.C. Penney done?

In many ways, J.C. Penney has already done a lot of the heavy lifting in its transformation. The company has revamped much of its merchandise, while also adding appliances to more than half of its stores. It has also added toy departments to all of its stores, expanded its store-within-a-store partnership with Sephora, and improved its in-store salons.

In addition, J.C. Penney has invested in an omnichannel shopping experience. This has included adding the ability to ship orders to customers directly from its stores.

"Our growth strategies and new apparel initiatives led to sequential comp sales improvement in nearly all merchandise categories in the third quarter, giving us confidence that our overall strategy and transformation is beginning to take hold," Ellison said. "While we have more work to do, we remain focused on two critical factors-to operate the business for growth and deliver positive earnings."

Is it enough?

J.C. Penney's problem is that, while it has been moving quickly, rivals including Wal-Mart (NYSE:WMT) and Amazon (NASDAQ:AMZN) have been moving quicker. For example, both of those retailers have made two-day delivery standard, while J.C. Penney lags behind, offering free delivery on orders over $49 in 3-5 days.

In addition, while J.C. Penney has improved as an omnichannel retailer, Wal-Mart has pioneered. The bigger retailer has added kiosks for in-store pickup of online orders to many of its stores, and equipped dedicated personnel with technology to make in-store pickup and returns of online orders seamless.

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Good, but not great

It's because the bar keeps rising that J.C. Penney will continue to struggle. The department store will likely survive 2018 and continue to advance its turnaround, possibly aided by continued store closures among its rivals and perhaps even one or more going completely out of business. But it's not keeping up with Wal-Mart and Amazon. That won't stop it from reaching profitability, but it will cap its success.

The coming year will be a good one for J.C. Penney as the chain sees the investment it made pay off. It won't, however, be an easy year, nor will it be the company's best year ever.

For management and shareholders, however, there is solace to be taken in the fact that the company appears to be on the right path to live to fight beyond 2018. That may not qualify as its "best year yet," but it's a lot better then what's happening to some of its rivals.